When we analyze our businesses, we’re drawn to look at the numbers provided to us by our accountants: cash flow statements, balance sheets, and income statements. And when we look beyond these to other numbers, they are typically derivatives that make up the former reports: sales, gross margin, etc. As managers, we tend to evaluate results by dissecting the tangible parts of our businesses. That’s how we can measure whether we’ve achieved positive results. Right? What about our intangible assets?
When it comes to our intangible assets, what do we do? How do we measure things like staff morale or the quality of internal communications? Do we neglect to measure equally essential things like organizational culture? What is the cost of operating without a strategic plan? Or, at the least, a marketing plan? Are these intangible assets measured in our business so we can evaluate and manage them in useful ways? And finally, is there a cost to our companies if we don’t?
I would offer that it is our intangible assets that determine our overall success in trumping our competition. If this is true, there is a disconnect in the reality of how we run our businesses. The result? We spend significantly less time managing the intangibles than we do the tangible. And that can yield some terrible results.
Let me give you a recent example that illustrates the cost of this dichotomy. Below is a true story about assets and their relative importance.
To measure or not to measure
A national organization (we’ll call that company “Daddy”) purchased a company (we’ll call it the “Baby” company). Before their acquisition by Daddy, Baby had a relatively happy workforce. They’d been an enthusiastic Predictive Index® client for many years – training all of their managers in the system. As a result, they generally had the right people in the right jobs and did their best to use the teachings of PI® to motivate their staff. They also had a clear market focus.
While they didn’t have a formal strategic plan, the CEO was a pretty good strategic thinker. The top management team communicated and worked well together. In short, the organization had a clear sense of where it was going. The culture was a “get it done” entrepreneurial one that people either fit into or didn’t, and the company worked to bring in people that did. The company was successful in a tough, competitive marketplace, and it got there by maximizing its intangible assets. That’s what made it an attractive acquisition.
Of course, you measure
Daddy consolidated a lot of similar Baby’s with Baby-like cultures into one company and began a drive for an IPO. (As the integration process took place, we gained entry with a number of the brothers and sisters of Baby. This close contact from a variety of perspectives allowed us a good view of what transpired.)
Daddy was quick to focus on the tangible assets; improving productivity and reducing costs. Initially, the numbers showed improvement because unnecessary costs were squeezed out across the businesses. The focus was on quarterly numbers, and thus efforts went from strategic to tactical to get the tangibles to “look good” for the investment community.
Based on what we saw, they placed little effort on evaluating or managing the organizations’ intangible assets. Dissatisfaction began to percolate as the market, and product focus became cloudy. Seemingly, what mattered were reports and the reporting processes – not the people that were generating them.
With the drying up of the money stream in the IPO market, the pressure from Daddy’s management intensified. A team from one a big consulting firms came in to advise Daddy on cutting more costs and creating the discipline needed to go forward. Their plan was all based on evaluations of tangible assets.
When tangibles cost you good employees
At this point, the numbers started to take a noted downward path. To compensate, a group of managers from a much larger traditional company were brought in to teach Baby and her brothers and sisters how a larger, more successful company operates. These managers implemented the rules of a much larger business on what was predominantly, until that point, a group of entrepreneurial companies. A common complaint among managers was, “they’ve got our best salespeople spending more time doing the paperwork than selling. And they wonder why sales have tanked. It won’t take the salespeople very long to find themselves other jobs where they can do what they do best.” And it didn’t. Many of the people who made Baby successful were leaving the sinking ship looking for a life raft.
To our knowledge, Daddy continues to measure, manage, and analyze tangible assets to the exclusion of its intangible assets. Talent from the former organization have mentally disengaged or departed. Morale is at an all-time low, and there’s no sense of a strategic or even a marketing plan. There are only tactics to drive sales, profits, and reduced costs. The culture is at odds with itself. Baby and its’ brothers and sisters have an entrepreneurial culture and structure that now has a traditional command and control platform superimposed on top of it by Daddy. It’s not working.
A step towards success
What can we all learn from this story? In their minds, none of their measures told them they were about to fail until failure stared them in the face. Without the metrics to measure the intangible, human side, Daddy was blindsided.
Their failure was visible to many from the time they changed the focus from serving the market to preparing an IPO – an action not measured on any report of tangible assets. The intangibles only got progressively worse from there, and we know where that got them.
Traditional tangible measures of a business are valuable. They let us know, in retrospect, the results of the productivity of our intangible assets. But it is our intangible assets that determine our ultimate success and failure. Our people, morale, strategic plan, culture, and market focus produce our measurable, tangible results.
You are well-served to focus on measuring, managing, and evaluating your intangible assets. If you’d like to learn how utilizing the Talent Optimization platform on The Predictive Index could help, contact me and I’ll walk you through the best options for your team.
At ADVISA, we pride ourselves on hiring the right team members who can adapt to change as it comes. Interested in learning about our culture? Powderkeg showcased it here!